Investment
Pass the Buck
BY MARC FABER
Ah, those balmy days of March 2000. The tech-stock-laden NASDAQ was at its peak of around 5,100 and had a total share value of $6 trillion. Since then it has been cut in half, poor thing. But don't weep for Nazzie: it still sells for more than 100 times earnings. Later this year, though, get out your handkerchiefs. Since NASDAQ companies' profits will drop to between $25 billion and $30 billion when the 2000 results are in, a total market value of less than $1 trillion would not be very surprising. That would mean the NASDAQ will fall below 1,000.
"Never!" say the ever-optimistic bulls. They argue that the Federal Reserve will aggressively lower interest rates, producing a soft landing that revives stock prices. The problem with this thinking is that the recent capital-spending boom and the resulting overinvestments — and downright bad investments in the high-tech and communication sectors — were a direct consequence of easy money and excessive credit growth.
Aggressive easing by the Fed will only lead to more unwise investments. These will weaken prices — and thus profits — even further.
There is another point worth considering. Every intervention into a free market leads to some unforeseen and frequently unpleasant side effects. Aggressive easing by the Fed, if successful in halting the economy's slide, could lead to a pickup in the rate of inflation and thus rising and not falling long-term interest rates.
In addition, given the U.S. economy's huge need for foreign capital to finance its excessive consumption, these policy measures would inevitably lead to the collapse of the dollar. So get out of the greenback and kiss the NASDAQ goodbye.
Known as Dr. Doom, Faber is a Hong Kong-based fund manager and editor of the Gloom, Boom and Doom report
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